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Thursday, September 28, 2006

Analyzing Coach's (COH) Market Share & Growth Potential

By Yaser Anwar, CSC of Equity Investment Ideas

Handbags are fashion statements, and women everywhere pay big dollars to carry the latest ones, be it: Jimmy Chu, Fendi, Gucci, Marc Jacobs etc. One handbag isn't enough. Women have had even more incentive to load up on handbags when fashionistas everywhere deemed it inappropriate to go out without your handbag matching your shoes.
I continue to see ample opportunities for COH as it further penetrates the estimated $4.8 billion US market for luxury handbags and small leather goods. Japanese luxury consumers provide significant growth potential as well.

Investors can expect COH to double its market share there to about 15% by 2010. With expectations of 20% sales growth in 07 driven by store expansion, a low double digit increase in same store sales for US retail locations, about $475 million in Japan-based sales, and a 15% gain in the indirect channel.

Coach has an array of products, from, of course, handbags to wallets, briefcases, outerwear, belts and shoes. It’s targeting the younger, hipper generation with iPod cases and letter charms.

I see favorable sales and earnings prospects for COH, which, in my opinion, warrant a premium valuation to peers. Same store sales advanced 21% in 06 vs 18% in 05 and 17% in 04. With 12% at retail and 32% in factory. As COH adds new categories, I think product diversification, increased store traffic and purchases at higher average prices will support a five-year EPS compound annual growth rate of 25%.

Coach’s average handbag retails for $250. But its new Legacy collection, which will be introduced in October, will average $325 a bag. To keep consumers always interested, Coach has been continually launching new collections. Its latest, released in July, is the Signature Stripe, which features lightweight, reversible handbags with a bold stripe and the interlocking C signature pattern.

Let me fill you in on it's market share. Coach is the "numero uno" luxury accessories brand in the US, with an estimated 23% share of this $4.8 billion market in $100 handbags.

This sub-segment of the handbags & accessories market grew at an estimated 17% pace in 05, following a 30% YoY gain in 2004, and 23% in 2003. COH was able to outpace industry growth and add an estimated five market share points in the 02-05 period, as it executed its five pronged multi-channel growth strategy.

The Japanese consumer makes up about 40% of the global luxury handbag market. COH estimates that it currently has 8% of the domestic Japanese market and aims to increase its share to 15% over the next five years by opening new stores.

Coach recently announced a 23% increase in net sales for its fiscal year, along with a 38% increase in net income. And with a goal of increasing its share of the US upscale handbag and women’s small leather goods market to 33 percent in the next several years, investors should continue to see substantial growth from Coach.

COH is pursuing two key strategies to strengthen its leadership position and build lasting market share: increase global distribution emphasizing its NA and Japanese direct retail distribution and improve productivity.

Over the next three years, COH plans to add 100 North American retail locations, bringing the total to over 300 locations. In Japan, COH is implementing a multi-channel model similar to that of the U.S. COH believes North America can support approximately 400 locations, and Japan, at least 180.

COH management has four initiatives to maximize productivity: 1) Intensify awareness as a gift resource 2) Develop under penetrated categories and emphasis new usage occasions 3) A merchandise strategy that provides the opportunity to graduate stores from core to fashion and fashion to flagship and enhance store service levels.

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